credule (version 0.1.4)

credule-package: Credit Default Swap pricing and Credit Curve bootstrapping

Description

Credit Curve boostrapping from market quotes (Credit Default Swap - CDS - spreads) and Credit Default Swap - CDS - pricing

Details

Package:	credule
Type:	Package
Version:	0.1.3
Date:	2015-08-03
License:	MIT + file LICENSE

A Credit Default Swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer (usually the creditor of the reference loan) in the event of a loan default (by the debtor) or other credit event. This is to say that the seller of the CDS insures the buyer against some reference loan defaulting. The buyer of the CDS makes a series of payments (the CDS "fee" or "spread") to the seller and, in exchange, receives a payoff if the loan defaults. It was invented by Blythe Masters from JP Morgan in 1994.

April 8 2009 saw a "Big Bang" in the market for credit default swap (CDS) contracts and the way in which they are traded. Both contract and convention changes were implemented simultaneously. These changes were designed to make CDS more standardised to help support efforts for central clearing of CDS trades, make strides towards T+0 trade processing and facilitate operational efficiency.

The CDS "Big Bang" has introduced standardized coupon dates and maturity dates. The functions provided in this package do not use these "new" conventions (i.e. they use the conventions pre-April 2008); therefore it's not recommended to use them in a production context. In most cases the differences are marginal, therefore these functions are good enough for preliminary research.

See vignette("credule") for more details.

Note. I'm planning to update this package with proper CDS ISDA conventions handling at a later stage.

References

ISDA Standard CDS Example http://www.cdsmodel.com/cdsmodel/assets/cds-model/docs/Standard%20CDS%20Examples.pdf

CDS Bing Bang http://www.markit.com/assets/en/docs/markit-magazine/issue-4/60-cds-big-bang.pdf

Examples

# NOT RUN {
library(credule)

yieldcurveTenor = c(1,2,3,4,5,7)
yieldcurveRate = c(0.0050,0.0070,0.0080,0.0100, 0.0120,0.0150)
creditcurveTenor = c(1,3,5,7)
creditcurveSP = c(0.99,0.98,0.95,0.92)
cdsTenors = c(1,3,5,7)
cdsSpreads = c(0.0050,0.0070,0.00100,0.0120)
premiumFrequency = 4
defaultFrequency = 12
accruedPremium = TRUE
RR = 0.40

# CDS pricing
res_price = priceCDS(yieldcurveTenor,
            yieldcurveRate,
            creditcurveTenor,
            creditcurveSP,
            cdsTenors,
            RR,
            premiumFrequency,
            defaultFrequency,
            accruedPremium
          )
res_price

# Credit curve bootstrapping from CDS spreads
res_bootstrap = bootstrapCDS(yieldcurveTenor,
             yieldcurveRate,
             res_price$tenor,
             res_price$spread,
             RR,
             premiumFrequency,
             defaultFrequency,
             accruedPremium)
res_bootstrap

# }